1099 Employee Rights: Guide for Independent Contractors and Employers
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Every year, workers worldwide celebrate May 1, International Workers' Day. The day commemorates workers' historical struggles and gains to bring us the 8-hour workday. Employees today celebrate and remember that event, encouraged by the spirit of brave workers from the 19th century. Today, minimum employment standards are protected by laws like the Fair Labor Standards Act of 1938, setting out employer obligations on minimum wage, hours worked, safety, and more.
However, some workers, such as independent contractors, don't follow a traditional 8-hour workday/40-hour workweek model. What working rights do independent contractors have?
It turns out that contractors are treated differently under the law than employees. If you’re a contractor, it’s important to understand and assert your set of rights when negotiating or signing a new contract.
What are independent contractors, and why are they called 1099 employees?
Independent contractors are professionals that companies hire for projects. When companies need labor, they either hire workers they manage themselves or external hires. Independent contractors, or freelancers, fall under the second group. In the US, contractors usually file as sole proprietors on their taxes, which means they work for themselves.
In the US, contractors may be called 1099 employees because they get a 1099-NEC tax form for tax filing purposes. This term is a bit of an oxymoron because a 1099 employee is not an employee in the legal sense; they are an independent contractor. However, it has become common for freelancers to be referred to as 1099 employees and full-time hires as W-2 employees.
Because contractors work for themselves, when a contractor enters into a working relationship with another company, the company is a client, not an employer. The company cannot expect a 1099 worker to work under the same rules as regular employees.
Independent contractors are not eligible for employee benefits, but they still have rights no company should overlook.
Key contractual rights you are entitled to as a contractor
As you’re paving your path as an independent contractor, it is in your best interest to attract as many clients as possible. Of course, you will probably accept a few jobs you’re not utterly passionate about, but that's how beginnings look.
Even if you offer lower rates and are ready to invest your blood, sweat, and tears into a project, that doesn't mean a client should take advantage of you.
Let your skills and previous work show you are a co-worker worth considering. Don't let anyone mistreat you. Know the following rights you are entitled to establish in a contract, as they distinguish you from regular employees:
Right to a contract
Once a contractor and a company come to an agreement for services, they can prepare a written contract specifying the project details, including the services they will provide, termination date, and how much and when they should be paid.
You have the right to an independent contractor agreement that clearly outlines the expectations of the duties you will perform and establishes a contractor-client relationship. If the contract terms are violated, either party is entitled to take legal action.
Right to control the workflow
Remember, when a client engages with you, that's like partnering with another company because independent contractors are self-employed.
You’re entitled to run your own business your way and control how to deliver the service or a product; a client company can't interfere.
Of course, before signing a written contract, a client can ask you about your workflow and determine whether they agree with such a work style.
Right to when and where you work
As an independent contractor, you don't have to work regular hours using the client's space and equipment. It is your right to determine when and where you work.
That's another distinction between 1099 and W-2 workers. Unlike regular employees, who usually work five days of the week, eight hours per day, independent contractors typically work on a project-by-project basis so they have an established due date when they have to deliver their work.
That's why being an independent contractor means the choice of working on weekends and from different places. Did someone say beach? - yes, that's an office, too.
Right to employ others
Contractors have the right to join forces to get the work done. For example, a 1099 employee is entitled to employ subcontractors. The roles are divided between a general contractor and subcontractors paid to complete particular tasks.
So, there's always an option of hiring other contractors, but ensure the client knows about it and includes it in the contract.
Misclassification is a dangerous game
Independent contractor misclassification refers to an illegal practice in which an employer categorizes a worker as an independent contractor when they are actually acting as a company employee.
That means that if your contractor rights above are not being followed by the employer, they’re at risk of misclassification.
As explained above, when a business hires an employee, the employee gets a W-2. In contrast, when it engages an independent contractor, the contractor receives IRS form 1099-NEC.
Rules defining employees and contractors vary by region. For instance, California law uses several legal tests for determining whether someone is an employee or independent contractor.
For contractors, a similar assignment of ownership agreement should be in place, where the work to be carried out by the contractor is explicitly described and the resulting IP appropriately transferred to the company. If the ownership agreement is too broad, this may be viewed as an indication of a direct relationship, resulting in misclassification of an independent contractor and additional legal risks.
Why do employers misclassify workers?
In short, to save on labor costs.
Regular employee hires are entitled to mandatory employee benefits such as Medicare. Because this adds cost to the employer, they may be more inclined to hire a contractor temporarily.
There’s no single rule or test that tells you if your work makes you an employee instead of a contractor. According to the Department of Labor, there are several factors that can be considered, such as:
- If a client expects you to work at their office
- If a client does not allow you to work with other clients
- If a client expects you to accept additional work
Risks of an incorrect employee classification
Independent contractors are not employees. If an employer demands something that goes beyond the conditions stated in your initial independent contractor agreement, you may be considered an employee under the law and be entitled to employee benefits.
Each new engagement requires a new contract. If a contractor feels mistreated or that their rights were disregarded, they can contact a legal professional for legal advice. If a contractor can make a case for misclassification, they can sue.
Misclassified employees can lead to a poor reputation for the company and financial and legal penalties.
Intellectual property rights
According to the Copyright Act of 1976, an independent contractor owns the rights to the work they complete for an employer; the Act protects an independent contractor's intellectual property rights.
However, you may automatically transfer rights to your work if your contractor agreement states the commissioning employer holds the rights, or the work is classified as "work made for hire."
Harassment and discrimination rights
No independent contractor should experience discrimination of any kind. Your work and experience should be the only two things qualifying you for the job. Everyone should be treated equally and with respect, regardless of personal characteristics such as race, color, ethnic origin, religion, age, or marital status.
However, you may not be legally protected under labor laws as a contractor. Federal anti-discrimination laws enforced by the United States Equal Employment Opportunity Commission do not cover contractors, for example.
It means independent contractors also lack protection from the Family Medical Leave Act, the Americans with Disabilities Act, Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, and the Fair Labor Standards Act.
What about local, regional, or state laws?
As stated above, federal US laws prohibiting discrimination and harassment like Title VII of the Civil Rights Act only cover employees, not contractors.
Still, regional laws may provide broader protection. For example, in some regions, anti-discrimination laws also apply to independent contractors.
Some state courts have determined equal opportunity rights for both independent contractors and employees. According to legal advocacy group A Better Balance, state-legislated protections exist in Maryland, Minnesota, New York, and Rhode Island. In other states, there may be specific protections (California, New Jersey, Pennsylvania, Washington), unclear protections, or no additional protections.
Rights you don't have
Although being an independent contractor means having the privilege of working for different clients from wherever you want, whenever you want, there are privileges full-time employees have, and you don't.
Minimum wage and overtime pay
Independent contractors are not entitled to a minimum wage guaranteed under the Fair Labor Standards Act.
Therefore, the first question clients ask when negotiating is: what are your rates? It is one of the most significant factors determining whether a client will accept your offer.
Considering that 1099 employees work per project, they are not obligated to spend, for instance, eight hours per day working on a project. However, contractors are not entitled to overtime pay.
So, even if you work more than 40 hours per week, a client is not obligated to pay you more than what was agreed in the contract.
Clients do not contribute to an independent contractor's unemployment benefits. If a client decides to end the collaboration, unemployment insurance is your concern, not theirs.
The solution to this not-so-pleasant occasion is for every 1099 employee to invest in the state's unemployment fund.
A 1099 employee must keep track and pay employment taxes and income tax to state and federal governments.
When a 1099 employee partners with a company client, they agree on the terms comprising the part where the client guarantees they will pay per completed project without deducting payroll taxes from that money.
In addition, the company is not obligated to make employer contributions for Medicare taxes and Social Security taxes. Those are the independent contractor's responsibilities—in fact, as your own employer, you will need to pay the employer’s share of the tax yourself.
When an independent contractor has an accident and gets injured, a client company doesn't have to pay compensation benefits. However, contractors in some states can contribute into a state workers' compensation fund to protect against such situations.
No vacation or paid holiday
Being your own boss allows you to give yourself a day off whenever you want. However, a vacation means days or weeks without work, and for independent contractors, no work means no revenue.
But being a 1099 employee doesn't mean zero vacation. If you’re new to contracting, you might be putting in more hours than friends who work as employees, but unfortunately, if you don't provide yourself paid time off, no one else will give it to you.
Independent contractors deserve to be treated as collaborators
Although business owners can't provide the same benefits to independent contractors and employees, it doesn't mean 1099 employees don’t deserve to be cut out from the team. Contractors deserve to be treated as true collaborators to the company mission. The key to a prosperous partnership between a client and a contractor lies in mutual respect and transparency within the boundaries of a client-contractor relationship.
All workers, including 1099 ones, need to feel valued to be productive and deliver desired results, no matter where they work. If you’re managing a workforce with contractors and employees, consider using Deel, the payroll platform built for remote teams. Deel’s friendly dashboard lets companies of all sizes offer a world-class payments solution to their workers. Contractors benefit from localized contracts, flexible withdrawals in multiple currencies (including crypto), automated invoicing, and more. Book a demo to find out more.
This article is provided for informational purposes and should not be considered legal advice. Consult a legal professional such as an employment lawyer in your region for specialized support on your contractor rights.